Sunday, March 25, 2012

Why Issuing Shares Isn't All Bad For Shareholders

I've seen one too many articles describing accretive share issuance as "dilution". I wrote an article at Seeking Alpha (which gets more page hits than I did when I wrote about it here in 2011) in order to explain the difference between issuance that dilutes shareholder value, and issuance that accretes shareholder value.

I hope they get it.

I also hope ACAS maintains its issuance discipline in its managed funds. It's been wonderful and I'd rather not see a good thing spoiled.


Anonymous said...

Hi JC,
let me begin by saying that I appreciate your work analyzing all things ACAS related.

I don't really agree with that your point here holds in general though, imho your conclusion only holds if you get the same average return (in perpetually) on the last dollar as the first one. Otherwise you are going to dilute future returns which leads to a diluted NAV vs the potential NAV at some later time.

Jaded Consumer said...

The linked article addresses this by comparing issuance by a firm with a business that can't be expanded at the same return by a new investment (e.g., Apple, which is selling product as fast as it can and won't sell faster with another $1B) to issuance by an investor in a market with a steady supply of equal-value investment candidates (e.g., a modest-sized participant in the enormous secondary market for mortgages).
If there's reason to believe that new investment isn't as productive as old investment, there's dilution not of NAV but of investment quality, which would have a real effect on returns.

Therefore it's important to know what sort of business is issuing shares and which sort of market it's in.

Thanks for reading :-)

Anonymous said...

The best return on investment would be the acquisition of ACAS at or slightly above NAV.

Jaded Consumer said...

While acquisition near NAV might not be a bad result from current prices, I'm not at all convinced that acquisition is really the best return on investment for shareholders.

The best return on investment for shareholders is likely a continuation of management's growth of NAV per share, followed by an eventual return to RIC status. RIC status --> dividend requirement; solid, healthy dividend --> trading near NAV; trading near NAV --> investor choice to exit near NAV or enjoy management's performance.

Anonymous said...

Extending the 'stock repurchase or dividend program' through the end of 2013 puts in question ACAS return to RIC status.

Jaded Consumer said...

I'm not sure how a program that could as easily pay dividends once the RIC test is met is a threat to the RIC test. Can you explain so I can follow?

Anonymous said...

It is a simple statement to follow. No further explanation is necessary.

Jaded Consumer said...

It's not the grammar that poses the challenge, it's the reasoning. If you would explain the reasoning it might be possible to understand it as something other than fearmongering.

As it is, the program permits dividend paying once the RIC test is met. How it impedes meeting the RIC test is something that has yet to be explained.